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I understand there is a lot of people, maybe even most, who believe day trading is far too risky or the person trying day trading won't be skilled enough. I have gotten interested into investing lately, so I've invested my small amount of money I get weekly mostly in mutual funds.

However, I am intrigued by day trading in addition to long-term investing. I have been watching a lot of videos online about it. Do you think that, given several years of practicing day trading / teaching myself about it in general (I wouldn't have $25k in account balance anyway for a few years), I could become successful?

I don't want to waste a lot of time learning something that is really only profitable for professional finance wizards. I am weary of listening to some random YouTube people saying this works, while also happening to sell courses in doing it.

If it matters, I am 18 and going to college for 4 more years.

Machavity
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MCMastery
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    Day traders know who they are. You don't "become" one, you either are or are not that personality. Successful day traders I know spent their youth in their parent's basement playing poker every night until 3am in the morning. Does that describe you? – Five Bagger Dec 17 '19 at 10:25
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    RE: trader won't be skilled enough. What "skill" would suggest as relevant? Being able to analyze the financials of a company? You won't be holding it long enough for that to matter. Ability to guess the reaction of the market to the latest headline on Bloomberg news? I'm very curious as to what that skill would actually look like. Something else? – Jared Smith Dec 17 '19 at 16:35
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    "Do you think that, given several years of practicing day trading / teaching myself about it in general, I could become successful?" The simple answer is no. The only money to be made here is selling the idea of it to others. – eps Dec 17 '19 at 16:40
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    @Dugan It's important to consider too the impact of fees and taxes. No country is listed but in the US, for example, short-term gains are taxed like normal income. You pay fees even if your bet loses. These headwinds make it even more difficult to succeed at this. – JimmyJames Dec 17 '19 at 16:56
  • @Dugan, Yes. Back in the late '90s when the Motley Fool website came online they had a tool you could use to pretend to buy stocks. I would make my picks, 'buy' 1 share and then track my overall performance over time. I pretty much broke even over the course of a year or so. You could even factor in the account trade cost if you wanted, which when buying and selling one stock at a time made it lose just about every time. You have to spend a lot of money to make up for each of those $7.95 trades. – Tracy Cramer Dec 17 '19 at 17:03
  • @JimmyJames Literally was just about to mention the same thing. Also, OP needs to be really careful about other issues with taxes. For example, if they have a really good year, then lose everything in the first week of January the next year, they still might have to pay taxes on the previous year's earnings. – anjama Dec 17 '19 at 17:07
  • There is not much to learn that can be taught in this regard other than covered calls. It is risky and rather stressful. You need to focus & pay attention while you are in play and be willing to act quickly (including taking losses), so it is not really an adjunct to studying. Large brokerages in the USA charge little by way of commissions nowadays so that is not a concern, taxes in the USA are the same (depending on bracket) as income. I would recommend 'play trading' for a while to see what 'might' happen. Be honest with yourself. Good luck. – copper.hat Dec 17 '19 at 21:43
  • Short answer: Yes. – EJoshuaS - Stand with Ukraine Dec 17 '19 at 22:27
  • Why do you just have to look at the extremes of buy-n-hold mutual funds for the long-term and day-trading on the other extremity? I mean, if you plan on having a day job you won't have time to do any day-trading! There are plenty of trading strategies between the two, and all types of time frames as well. With some education and planning, you could easily set-up a trading system that might keep you in a trade for a couple of weeks to a few months, spending an hour or 2 each night to make your decisions and place your trades, then concentrate on your day job during the day! – Victor Dec 18 '19 at 00:28
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    @Victor Actually I have started experimenting a tad with swing trading (i.e. only one stock so far). I bought it at the right time by looking at the indicators, and just now it has started growing. I'll see if I can sell at the right time, too. Maybe if I get somewhat good with that I can do that in addition to holding stocks / funds long-term? – MCMastery Dec 18 '19 at 03:54

5 Answers5

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The vast majority of people that day trade lose money. Of those that make money, most aren't going to beat an index fund. Of those that actually beat an index fund, very few do so without investing so much time that they'd be better off working elsewhere. If you have a $1 M portfolio and you can reliably beat an index fund by 1%, that's worth $10,000. If you're spending 20 hours a week, that's 1000 hours a year so you're valuing your time at $10/hour. You'd do better working those 20 hours a week at McDonalds or putting in extra time at your day job (particularly as a fresh graduate). If you've got a $100,000 portfolio, you'd be valuing your time at $1/hour.

There may be folks that actually have the skill to beat an index fund year over year. My wager, though, is that it is luck an survivorship bias more than skill-- if you have a 50% chance of beating the market in any particular year and you start with 1024 traders, you'll likely end up with 1 that beat the market every year for a decade merely by chance. If you got 1024 gamblers together and had them bet red or black on a roulette wheel, 1 would win 10 spins in a row. Whichever gambler happened to hit that amazing streak would happily and loudly tell you about his "betting strategy" and convince you to follow it. The 1 gambler that lost 10 times in a row would be a lot less vocal.

Most mutual funds fail to beat the market consistently (particularly after fees) and those are run by large finance companies that can employ small armies of analysts, traders, programmers, etc. They spend huge sums to get market data fractions of a second before you do, run it through the fastest hardware you can buy programmed by a small army of developers implementing algorithms developed by teams of PhDs in quantitative finance. If there was a way to learn to consistently outperform the market, you'd have to expect those companies to find and exploit it. If they can't, I'd wager that you can't either. Most people that tell you that you can learn to day trade are lucky, bad at accounting (i.e. they think they're doing well because their portfolio has grown even when it's lagging a simple index fund), or just trying to sell you some "How to Daytrade" courses (hint, if you could beat the market consistently, you're not going to be selling courses on how to do it to college students, you'd be making billions of dollars running a hedge fund or teaching hedge funds how to beat the market).

I'd recommend focusing on your college classwork for now. Put your money in an index fund, let it work for you, keep your focus on college. If you want to get involved in active investing, learn about how to do fundamental analysis and look to buy some value stocks that you can hold for years and decades, not hours and minutes. It's rare but there are handfuls of people that beat the market over time with that approach (think Warren Buffet for example). You probably won't beat the market investing in individual stocks but you're a lot less likely to lose everything. And learning fundamental analysis has benefits outside of investing when you're dealing with problems in the business world.

Justin Cave
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    +1 And regarding "Most people that tell you that you can learn to day trade"... the ones that aren't selling you books on the subject are essentially just the product of survivorship bias... they're the ones that won 7 of the 10 coin tosses. The ones that lost 7 or more times never seem to be as vocal! – TripeHound Dec 17 '19 at 09:11
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    As you say: the easiest way to make money from day trading is to sell books purporting to teach it. – Chronocidal Dec 17 '19 at 13:00
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    I really can't emphasize enough how these big trading firms have every advantage; from low-level specially designed hardware/FPGA to renter server space that is physically as close to an exchange as possible. They spend millions to get market data faster than you. They employee entire teams of traders that are dedicated to tiny segments of the market, who are supported by entire teams of other professionals (like an entire team to stay on top of corporate actions). Those traders have all the knowledge in the world, yet virtually none of them quit to day trade solo. – Rob P. Dec 17 '19 at 14:03
  • "You probably won't beat the market investing in individual stocks but you're a lot less likely to lose everything." I don't really understand what you mean by that. You're definitely more likely to lose everything investing in individual stocks than investing in index funds. – Daniel Dec 17 '19 at 15:44
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    @Daniel - Compared to day trading. If the OP wants to get involved in active investing, I'm saying that it makes more sense to learn fundamental analysis to pick a few stocks to hold over the long term rather than learning to day trade. – Justin Cave Dec 17 '19 at 15:46
  • A large majority of retail that attempts to day trade loses money. period. However, it's wrong to assume that any form of increased trading will lead to the same result. Categorically dismissing trading is wrong because there are some narrow instances where a willingness to trade can increase the return without adding a penny of additional risk. I will also attest that in high volatility market periods (2008-2009, Feb and Dec 2018), trading will outperform buy & hold. It's the rest of the time that's a problem. With that, have at it :->) – Bob Baerker Dec 17 '19 at 18:07
  • While it is certainly plausible, can you substantiate or quantify your first assertion? – copper.hat Dec 17 '19 at 21:48
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    @copper.hat - Good point. Linked to one paper that goes into some detail on how frequent traders generally lose money and underperform the market. – Justin Cave Dec 17 '19 at 22:50
  • Nice answer. Reminds me of one of my own from a few years ago. :) https://money.stackexchange.com/a/67265/17718 – TTT Dec 17 '19 at 22:51
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"High-frequency trading" has made day trading basically obsolete. Computer systems can take an order feed, process it through a set of algorithms, and issue an order in under a microsecond. The company operating this system will have a team of PhDs analysing the effectiveness of the strategy and tuning it frequently. Your odds of reliably beating this as a day trader are .. low.

There are also a large number of companies out there looking to exploit the fantasy of getting rich from day trading. Things like "binary options" are basically unregulated gambling, and in many cases you can lose more than you invest.

Given your situation I would look at your nearest investment bank's job listings and over the course of your degree (which should be maths or a maths-heavy subject) work towards that. While it's very hard work it's also very well paid, and much less exposed to the risk of losing all your investment.

pjc50
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    "High-frequency trading" has not made day trading basically obsolete. HFT attempts to capture price discrepancies between supply and demand that often exist for only a fraction of a second (latency advantage arbitrage). As an example, the correlation b/t S&P 500 ETFs and futures contracts breaks down below 250 milliseconds. HFT competes against other HFT-ers not traders and investors with longer time frames. – Bob Baerker Dec 17 '19 at 14:12
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    So where is the "alpha" left lying on the table that the day traders might be able to exploit? – pjc50 Dec 17 '19 at 14:31
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    I don't know if the "alpha" question was directed at me or at the OP but I'll offer this. BIIB closed around $222 on 10/21. They announced earnings the next morning as well as news on their Alzheimers drug. It began trading seriously in the early pre-market at about $225 and over the next 1/2 hours it rose to $325 There were no gaps and several retracements. It opened the regular session around $310, rose to $318 and ended the day at $282. That's what a day trader chases, on the long and short side. That is not what HFT chases in its millisecond to multiple second trading time period. – Bob Baerker Dec 17 '19 at 17:52
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    Where do you get that HFT makes day trading obsolete??? First, HFT is down on volume and second, it increases volatility, which is good for day traders. – copper.hat Dec 17 '19 at 21:46
  • @copper.hat the speed of modern automated trading systems means they can react far quicker to price fluctuations than day traders in their back rooms ever can. Combine that with the data being made available to small traders (as you will be) being delayed by longer than the data available to the automated systems (whose owners can afford the exorbitant fees for that realtime data) and you're set up to lose. – jwenting Dec 18 '19 at 05:55
  • @jwenting: Of course there are some trades for which hft will be a big advantage. But there are still many opportunities for short-term trading that don't rely on instant reactions. – copper.hat Dec 18 '19 at 06:06
  • @copper.hat instant reaction is pretty much the definition of day trading... It's based on rapidly reacting to tiny price fluctuations, something that modern automated systems have made pretty much impossible to do for small individual traders working out of their living room using teletext (or some website) to get the price fluctuations – jwenting Dec 18 '19 at 06:09
  • @jwenting: Certainly one aspect, but hardly the definition. There are lots of stocks that have large short term (as in daily, or a few days as opposed to ms) volatility that is not just arbitrage. Regardless of hft, few retail day traders have the resources (both in margin & execution speed) to exploit arbitrage; this has been true since before hft proliferated. – copper.hat Dec 18 '19 at 06:28
  • @jwenting - Yes, automated trading systems can react far quicker than a retail trader because of computer speed, quant driven algorithms, latency advantages, etc. but data availability is no longer an issue. Some brokers offer DTE connections which links their real time platform data to Excel (at no cost). Therefore, retail is not disadvantaged in this regard. – Bob Baerker Dec 18 '19 at 14:28
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The fundamental problem with day trading is that it's essentially gambling - you are buying this or that stock in the expectation that its price will increase in the short term. But this is subject to the problem of the Gambler's Ruin ( https://en.wikipedia.org/wiki/Gambler%27s_ruin ).

You are betting your fixed resources against an opponent ("the market") with essentially infinite resources. Even if on average stocks go up in the long term, in the short term they fluctuate. If you stay at it long enough, eventually you will hit a losing streak that will wipe you out. "Successful" day traders are just the ones lucky enough not to have been wiped out YET.

jamesqf
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I've worked in stock market data analysis and distribution (albeit it was some time ago, around the time of the 2007 crash).

Day traders are losers, literally.

There's no way you're going to be able to compete with the large trading institutions and their automated systems. These systems can react far faster to market fluctuations than you will ever be able to manually. Plus they don't incur the transaction fees and delays with brokers that you as a small time player will inevitably have to deal with.

Also, these large trading firms have access to market data that's far more accurate and up to date than what's sold (or worse yet, freely available) to the small traders in their living room or home office.

While in theory you could buy the realtime data (well, delayed by a fraction of a second to a few seconds depending on the source) but it'd be prohibitively expensive, and the cheap data is updated only once an hour or so, maybe once every 10 minutes for an intermediate plan.

For day trading, which depends on making snap decisions on rapidly fluctuating prices, that's lethal. And without a budget of many millions of dollars in ready cash to buy and even more invested already in stock, you're not going to be able to afford the more up to date data sources simply because of their price.

You're also not going to get the high speed transactions that make use of such data sources worth the cost, as you'll be dealing through brokers that typically delay your transaction a bit in order to bundle it with other transactions in order to reduce their operational cost (say you order your broker to buy 100 shares in XEDAS, he'll delay that for maybe 10 minutes in the hope of getting more orders for that stock, as his cost to place an order doesn't depend on the size of the order, only on the number of distinct instruments). That broker also will charge you fees, of course, which fees may well be higher than the return on rapidly buying and selling small amounts on minute price fluctuations, and again you won't have the money to buy large enough amounts in order to make that game yield enough income to yield more than the brokerage fees per transaction.

As a small time investor, it's far better to buy into what appears to be a stable, slowly growing, portfolio. A few transactions per month in normal times, each large enough to make the transaction fees small in comparison to the transaction size, and keep that stock long term even if the price fluctuates downward for a while (of course if it appears to be going down the drain completely, maybe because of changes that make the company unstable, sell off and reinvest in something else, but don't do so just because this morning it was 10 cents higher than it is in the afternoon).

jwenting
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No, it is not a complete waste of time. It could result in a loss of money, but you will definitely learn something! Early experience in the market is valuable and so is pursuing areas of interests, especially if it could lead to a career. Squeezing out every penny from your investment isn't necessarily the most important thing when you are very young. Just take caution, which you are already demonstrating by posting here.

The Gilbert Arenas Dagger
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  • That's a potentially expensive and time-consuming way to learn something. Why not just read a book or something? – EJoshuaS - Stand with Ukraine Dec 17 '19 at 22:28
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    There are things you can learn by doing that you can't learn from a book. Like... how do you react when the market takes a downturn? Can you stomach it? But more importantly, if it's a passion and OP is aware of the risk then it shouldn't be written off outright. Maybe it could turn into a career choice. I felt a contrary opinion was worthy of posting. – The Gilbert Arenas Dagger Dec 17 '19 at 22:33
  • See the accepted answer - the probability of this being profitable enough to be worthwhile is extremely low. Presumably, the OP is looking to make money off of this, not just for an expensive lesson. – EJoshuaS - Stand with Ukraine Dec 17 '19 at 22:41
  • Also, losing money just to see if you can stomach it doesn't seem like a very good idea. – EJoshuaS - Stand with Ukraine Dec 17 '19 at 22:42